Monday, January 23, 2012

This article talks about how wealth advisers are advising their clients that they will probably have to work in their retirement. This is exactly what happened in Australia in the 90's. The result was the creation of a plethora of new business's. Retirees doing something they had always had a passion about. Creating the best muffin, the best wine, the best restaurant the best design of a building updating their homes etc etc. We will all benefit from the change. Aivars Lode

For nearly 20 years, many financial advisers have operated under the notion that most retired clients can confidently spend a maximum of 4% of their nest egg — adjusted for inflation — each year without worrying about running out of money. Now, thanks to myriad factors that include the economic downturn and relentless stock market volatility, many are reconsidering whether the so-called 4% rule makes sense.
“The reason for rethinking the 4% rule is that we believe returns will likely be lower than they were over the last 75 years and that volatility will be higher,” said Harold Evensky, president of Evensky & Katz Wealth Management. “There's a strong consensus that forward-looking returns are going to be modest.”
Jim Heitman, an adviser at Compass Financial Planning, agrees.
“We're a little less aggressive on the withdrawals; we aim at taking 3.5%,” he said. “For most of my clients over the last few years, that rate has dropped down to 3%.”
The 4% figure is the product of research by financial planner William P. Bengen, who analyzed different withdrawal rates and asset allocations to see how each would have fared over a 30-year retirement period starting every year from 1926 on.
In 1994, after examining the historical returns of a portfolio of 50% stocks and 50% bonds, Mr. Bengen determined that a client who started withdrawals anytime between 1926 and 1976 could have lived off the portfolio for at least 30 years if he or she made 4% annual withdrawals that were adjusted for inflation.
In 2004, he added small-capitalization stocks to the model and revised the withdrawal rate upward to 4.5%.
Fast forward to the present.
Like they have with some other long-held investment beliefs — “stocks outperform bonds over the long term” and “diversification is king” — advisers are starting to question the validity of the 4% rule. Some are recommending withdrawal rates as low as 3%.

PROCEED WITH CAUTION

Even Mr. Bengen, who serves as president of Bengen Financial Services Inc., is warning clients that now is a good time to err on the side of caution with regard to withdrawals.
“We don't know where this is going to end up, but this is a good time to be conservative and prepare for a possibility that we may enter a period of time that's even worse than the 1970s,” he said.
Mr. Bengen readily admits that the 4% rule isn't perfect.
For one thing, it starts to unravel during periods of high inflation, when withdrawal rates can quickly escalate to unrealistic levels.
Also, the rule is based on a buy-and-hold strategy, which “is nuts in this environment,” Mr. Bengen said.
“You get zero returns by just holding,” he said. “I try to get my clients out of the market when it's expensive and get them in when it's cheap, rather than just sitting there and getting beat by the market.”
But the buy-and-hold component isn't the only reason why an update is warranted, experts said. Low interest rates hurt the earnings from fixed-income investments held in the portfolio.
“A big chunk of your withdrawals is made of earnings from interest, and right now, that's going to be depressed,” said Steve Vernon, actuary and president of Rest-of-Life Communications. “Four percent is a good starting point, but you ought to reflect whether your assets went up or down.”
More and more advisers are resigning themselves to the notion that there is no such thing as a one-size-fits-all withdrawal rate.
“You need to put the withdrawal rate in context: How old are you? What other assets do you have?” said Moshe A. Milevsky, associate professor of finance at York University.

UNIQUE CIRCUMSTANCES

In calculating withdrawal rates, advisers must take into account clients' unique circumstances, such as whether they stopped working amid a major downturn.
One of the biggest risks that clients face early in retirement is so-called sequence-of-returns risk — that is, that negative returns early in a withdrawal program can create disastrous initial conditions from which recovery is nearly impossible. That is especially true for clients with most of their assets in 401(k) accounts.
As a result, Mr. Milevsky deems a withdrawal range of 3% to 6% to be acceptable — the lower end for those who lean entirely on their 401(k)s and the upper end for investors who also have a pension or lifetime income through an annuity.
“When people have a great defined-benefit pension that they can fall back on if all hell breaks loose, then they can use that 6%,” he said.
“People have to start thinking about the withdrawal rate question together with their balance sheet. You can't determine it in a vacuum,” Mr. Milevsky said.
Investment fees are another component to weigh, as actively managed funds cost more than their passively managed counterparts.
Retirees need to account for fees' drag on the funds' performance, Mr. Vernon said.
“You should only do 4% if you're finding index funds with low expenses, and you should make it 3% if you're going with an actively managed fund,” he said.
Although experts can point to facts underpinning their rethinking of the 4% rule, advisers are finding that this is a tough conversation to have with clients.
In some situations, investors and advisers feel that anything less than that standard withdrawal amount would be insufficient for retirees.
“People need to know they shouldn't take income if they don't need it, but how do you go lower than 4%?” asked Meg Green, founder of Meg Green & Associates.
Meanwhile, others simply get their investors used to the idea of living on less.
Victoria L. Fillet, founder of Blueprint Financial Planning, aims to provide clients a fixed dollar amount that can cover their living expenses. She has also had to brace clients for the prospect of working part time during retirement.
“There are always clients who think that you're crazy, and go somewhere else,” she said. “I'd rather be cautious when I'm 70 and early in my retirement so that later on, the money will be there.” dmercado@investmentnews.com

What is not said in the following article is that the race is on to discover something faster than light, Why? All financial transactions occur at the speed of light due to optic fiber transportation of messages around the planet, including all stock buys and sells. Imagine trying to buy stocks using the old ticker tape. If there is something faster than light, then he who has mastered that controls all financial markets. Thanks Marcus for the article. Aivars Lode

A giant 'telescope' more than half a mile in length is to be built two miles beneath the surface of the Mediterranean Sea in a bid to reveal new secrets about the universe.